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USAA: Catastrophe Risking Financing Case Solution & Answer

USAA: Catastrophe Risking Financing Case Solution

The value of the ROL and price at layer 5 is calculated by using the data of probability of the loss and the value of loss provided by the actuaries. For the calculation of the ROL and price at layer 5, the value of the probability of loss is required which is calculated by looking at the table and graph, which are provided by actuaries in Exhibit 4. (Refer to excel sheet Actuarial Estimates)

  1. What percentage of losses in layer 5 did USAA coinsure? What percentage is re-insured through a third party?

The value of losses in reinsurance agreement is expected to be not insured completely as some percentage of losses is coinsured. At layer 5, the value of the reinsurance contract is $500m. The value of the cover will be 80% with $500m, which will be insured by the third party, and the value of the coinsurance will be 20%.

  1. Why is coinsurance a feature of the CAT bond structure?

In CAT bonds, there is a feature of coinsurance as insurance companies arrange a reinsurance agreement with the reinsurance companies, which helps to mitigate the risk of losses that could incur as a result of the catastrophic event. In the reinsurance agreement, both insurance and reinsurance companies bear the percentage of loss. Hence, the purpose of coinsurance is to set a percentage of loss for both insurance and reinsurance firms. Such feature is not found in the normal insurance agreement, and the purpose of the CAT bonds is to reduce the value of losses against catastrophic events. Therefore, coinsurance is the feature of CAT bond structure………………..

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